Unfortunately, I can’t diagnose this error alone. But there are several things you can try:

Have you properly extracted the Touchless.zip file to another location on your computer? You can’t execute the demo from within the Touchless.zip file.
Ensure that the extracted WebCamLib.dll and TouchlessLib.dll are in the same folder as the TouchlessDemo.exe file that you are executing.
If all the files are in place, ensure that you’re running on a supported OS. XP, Vista, Server 2003, and Server 2008 should work.
Additionally, ensure that you have a functioning DirectShow compliant webcam. The best way to do this is test the webcam with other DirectShow applications.

If you still can’t get the demo to work, I’d be happy to take details of your configuration and try to investigate further.